Key Events This Week: November 30th – December 5th:
Tuesday: USD ISM Manufacturing AUD RBA Rate Decision
Wednesday: AUD Gross Domestic Product CAD BOC Rate Decision USD ISM Non Manufacturing
Thursday: GBP BOE Rate Decision EUR ECB Rate Decision ECB Press Conference
Friday: GBP BOE Inflation Forecast EUR Eurozone GDP CAD Unemployment Data USD Non Farm Payrolls
USD will likely continue to see strength as data outperforms, and central banks elsewhere ease further. At the moment, the market believes USD can strengthen even without the support of yields, as the US remains a relative growth out performer, illustrated by the recent upward revision in GDP. In the upcoming payrolls release wage data will be important. Increases in wages will be necessary for the Fed to take a more hawkish stance.
ECB members, and particularly ECB president Draghi, have become increasingly aggressive in their language recently,highlighting the central bank’s doveish stance, and adding to pressure on EUR. Given the verbal build up to the December meeting, EUR could see a bounce if there is no action announced. It is possible the ECB waits until the end of Q1 2015 to begin purchases, as it waits to see the impact of the TLTROs – but at that point, EUR would sell off.
Markets are cautious that outright JPY weakness could be limited at this stage. Positioning is already stretched, meaning that the pace of depreciation could slow somewhat. The BOJ minutes suggested that the latest BOJ easing comes at a cost and therefore there could be hurdles to further action. The market believes the upcoming December 14 election will require an overwhelming victory by PM Abe in order to drive further JPY depreciation
Market anticipates GBP to remain soft against USD, but look for it to outperform EUR. Data in the UK remains reasonably robust, but underlying concerns still remain, investment was soft in the latest GDP release and Governor Carney believes that inflation could decline below 1% in the future. That said, there have been more hawkish comments from the BOE recently, which contrasts from the doveish tone coming from the ECB.
AUD received only limited support from the latest rate cut in China. Markets have realized that this cut is unlikely to change the path of Chinese rebalancing, as the country shifts away from its export oriented focus towards a more domestic driven growth model. Given rising deflationary pressures in Asia, it will be interesting to see what tone the RBA
takes at its upcoming meeting.
Canadian data has held up relatively well despite weaker oil prices as US growth supports the Canadian economy. Markets believe that CAD could outperform other G10 currencies which have much higher exposure to deflationary pressures in Europe and slowing growth in Asia. Indeed, Canadian CPI surprised on the upside last week, contrasting with deflationary pressures seen in many G10 economies.
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